The United States is not the only industrial nation to face a
looming crisis in its program to provide retirement income to a broad
cross section of older citizens. As a first step toward overhauling
Japan's even more troubled system (see
JEI Report No. 12A,
March 28, 1997), the Diet approved a package of seven bills
March 28 that will trim benefits and shore up funding. Critics
complain, though, that the legislative initiative, which the Diet
first tackled during last year's special session, raises almost as
many questions as it resolves, in part because coalition government
lawmakers tried to make some aspects of the reform less onerous to
participants.

The changes affect both the national pension plan, or kokumin
nenkin, which is somewhat analogous to the social security system in
the United States in that it potentially covers virtually all people,
and the various second-tier public-private retirement plans
collectively known as kosei nenkin. The latter, however, will bear
the brunt of the adjustments.

Starting April 1 of this year, salary-linked benefits for new
private-sector retirees who participate in kosei nenkin plans will be
cut by 5 percent. Moreover, between FY 2013 and FY 2025, the eligible
age for kosei nenkin payments will be raised in stages to 65 from the
current 60. In the future, consequently, some employees who are
forced by their firms to retire at age 60 may have to wait five years
to receive benefits. At the same time, the large number of people
between the ages of 65 and 69 who still work face the prospect of
reduced retirement income, with the size of the hit depending on
their salaries or wages. However, the increase by 2025 in employee
contributions to the kokumin nenkin system will be somewhat less than
previously forecast.

Most of the 20 million people who now depend on kokumin nenkin
benefits will not be affected right away. In fact, they probably will
come out ahead in the long run. The reason is that the just-approved
legislation mandates an increase in the Treasury subsidy to the
kokumin nenkin system to 50 percent by 2004 from the current
government funding level of 33.4 percent. The Liberal Democratic
Party and its allies maintain that the hike in public financing is
necessary given the projected decline in the number of workers to
support each retiree. There will be just two workers for each retiree
in 2020 versus 4.4 workers as recently as 1997.

As a consequence of the changing funding formula, the projected
monthly increase in employee kokumin nenkin premiums will be scaled
back by 31.1 percent compared to the level they had been expected to
reach by 2025. However, the increase in government funding 
estimated at a whopping ¥2.2 trillion ($20 billion at
$1.00=¥110) annually, is unfunded at this point. That is one
reason why the opposition parties voted against the legislative
package.

In short, retirees' government-provided pension-type income will
change according to how long they work and which plan or plans they
participate in. For Tokyo, which currently has the largest budget
deficit in the industrialized world, the legislation saddles it with
future tax obligations while also enabling it to cut benefits. The
two, however, do not cancel each other out. Not a few critics contend
that Tokyo should begin looking now for additional revenue sources.
Some even have advocated another hike in the consumption tax, which
was raised in April 1997 to its current level of 5 percent from 3
percent, with arguably disastrous effects on the economy.

In the present environment of "dessert before elections,
vegetables after," virtually no one expects the LDP to propose a tax
hike any time soon. Yet, most analysts agree that one eventually will
be necessary.

As if to underscore the demographic changes that are driving
Tokyo's reform of its social security-like system, the Management and
Coordination Agency announced March 23 that Japan's population
grew last year by a scant 0.16 percent from 1998's total to 126.7
million, the smallest increase yet. Moreover, the population under
the age of 14 dropped to 18.7 million, or 14.8 percent of all
Japanese  the first time that this figure has fallen below 15
percent. This cohort, of course, is the group that will be paying
presumably higher kokumin nenkin premiums and taxes 25 years from now
to partially support Japan's ever-growing older population, which
expanded 3.2 percent last year. The census also revealed that the
number of people between 15 and 65 years old, traditionally
considered the working-age population, had declined for the fourth
year in row. In short, the ranks of people receiving social
security-type benefits are rising, while the group paying into the
system arguably is shrinking. Not only is the premium burden on the
employed population expanding, but it may worsen when the youngest
cohort replaces the current group of workers.

These demographic facts also are affecting labor policies. Even
though unemployment remains close to its postwar high of 4.9 percent,
Tokyo again is worried about an expected labor shortage, just as it
was during the "bubble economy" years of rapid growth in the second
part of the 1980s. In a plan released by the Ministry of Justice
March 23, the government said that it would consider permitting
larger numbers of foreign workers to enter Japan to fill job openings
in certain fields. In yet another acknowledgement of shifting
demographics, nursing and home health care for older people are among
the occupations for which easier entry requirements are being
weighed. Japan and MOJ in particular traditionally have maintained
policies toward "guest" workers that by North American and European
standards are unusually strict.

The size of government-provided retirement benefits in the future
will depend a great deal on how well the economy does. If Japan can
reignite sustained growth in this decade, the income base that
supports its social security-like program obviously will increase.
However, most analysts believe that Tokyo remains too optimistic in
its assumptions regarding both economic performance and population
expansion. If the economy grows extremely slowly over the next 10
years, per capita income could even decline, reflecting the fact that
the income produced by a shrinking labor force will be spread over a
still-growing population. Obviously, the job of supporting an
ever-bigger group of older people would be a severe burden under
these circumstances.

Clearly, an expansionary fiscal policy in the form of larger
public-sector expenditures cannot be continued indefinitely in light
of the demographic changes that increasingly will drain government
coffers. Over the long term, most analysts believe that the
restructuring of Japan's economy, including widespread deregulation,
is the only answer. In other words, the public pension system,
immigration policy and structural reform have to be treated as a
unit. Whether Tokyo will end up with a set of cohesive, consistent
policies over the next decade to deal with these related issues
remains to be seen, the latest retirement plan reform
notwithstanding.

The views expressed in this report are those of the
author
and do not necessarily represent those of the Japan Economic
Institute